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Just Released: New York Fed Press Briefing Highlights Changes in Home Equity and How It’s Used

At a press briefing this morning, economists at the New York Fed focused on the evolution of housing wealth and its use as collateral. Their comments came in connection with the Center for Microeconomic Data’s release of its Quarterly Report on Household Debt and Credit for the first quarter of this year. The briefing opened with remarks from Director of Research Beverly Hirtle, who described the importance of housing wealth and how it has evolved since 2000. Bank economists then explored the data on housing wealth more deeply in this presentation, which includes three parts: (1) an overview of recent developments on household balance sheets, with a focus on housing values and mortgage debt; (2) a discussion of how housing wealth has changed over time and how it is distributed across households; and (3) facts on the changing nature of how households have used their home equity.

Updated Data on Household Credit Trends
The Quarterly Report for the first quarter of 2018 shows a continued increase in debt balances, which rose $63 billion during the quarter, driven by increased mortgage balances (+$57 billion). Other debt balances were mixed: auto and student debt rose, while credit card and home equity lines of credit (HELOC) obligations fell. As of March 31, 2018, total household indebtedness was $13.2 trillion, $536 billion higher than the previous peak in the third quarter of 2008 and 18.5 percent above the trough in the second quarter of 2013.

Although household debt has been growing for five years, its growth has been slow relative to earlier periods, as mortgage debt has continued to be relatively flat. In the first quarter, aggregate delinquency rates improved, as rates on mortgage and HELOC debt declined further, while delinquency on auto and credit card debt increased.

Both slow-growing aggregate balances and continually improving aggregate delinquencies are at least partly attributable to tight lending standards for housing debt—mortgages and HELOCs. While standards on HELOCs have always been quite stringent (even in 2005, the median credit score of new HELOC borrowers was over 750), those standards have tightened further since the financial crisis and in 2017 the median score was almost 800. Mortgage standards have also been very tight since the crisis, but unlike HELOC standards, underwriting for installment mortgages has loosened a bit recently.

Home Equity Has Risen Above Its Prior Peak, but Now Is Rarely Tapped
Home equity—the difference between house value and the debt it secures—is an important asset for households of all types. After a long and pronounced decline beginning in 2006, both home equity (in early 2017) and home prices (in late 2017) have recently recovered their previous nominal peaks. But there have been significant changes in the ownership of this form of wealth over this period. In addition, tight lending standards have made it difficult for younger and less seasoned borrowers to obtain mortgages, which has contributed to a large decline in homeownership among younger borrowers and those with lower credit scores. As a result, housing wealth has shifted toward older, higher-credit-score borrowers. Since a key function of housing equity is to serve as collateral, this pattern has meant that for those likely to have the highest demand for debt (younger borrowers and those with a need to smooth their consumption or invest in their education) slower equity accumulation means that collateralized credit has been less available.

This has been compounded by even tighter underwriting on home equity extraction; even if they have some housing wealth, collateralized credit has been harder to get for younger, less-than-superprime borrowers. We see clear evidence of this in a dramatic reduction in the issuance of cash-out refinances and HELOCs in comparison with the last time households held this much equity.

So the household sector is holding a lot of housing wealth that could conceivably serve as a cushion against labor market or other aggregate shocks. But that wealth is less likely to be held by those most exposed to such shocks, pointing (again) to the complex connections between financial conditions and macroeconomic stability.

Disclaimer The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Andrew Haughwout is a senior vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Donghoon Lee is an officer in the Bank’s Research and Statistics Group.

Joelle Scally is the administrator of the Center for Microeconomic Data in the Bank’s Research and Statistics Group.

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Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, Donald Morgan, and Asani Sarkar, all economists in the Bank’s Research Group.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.

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